J.C. Penney Co. v. Giant Eagle, Inc. ( 1996 )

Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit
5-24-1996
JC Penney Co Inc v. Giant Eagle Inc
Precedential or Non-Precedential:
Docket 95-3054
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_______________
No. 95-3054
_______________
J. C. PENNEY COMPANY, INC.,
Appellee
v.
GIANT EAGLE, INC.; GIANT EAGLE MARKETS,
INC., and STANLEY R. GUMBERG, individually
and as Trustee under those certain
Irrevocable Deeds of Trust dated May 9,
1969,
GIANT EAGLE, INC.,
Appellant
_________________________________________________
On Appeal From the United States District Court
For The Western District Of Pennsylvania
(D.C. Civil No. 92-cv-01769)
_________________________________________________
Argued: October 27, 1995
Before: STAPLETON, McKEE, Circuit Judges, and
JOHN R. GIBSON, Senior Circuit Judge
(Filed May 24, 1996)
RALPH A. FINIZIO, ESQ.
(argued)
Houston Harbaugh
Two Chatham Center
12th Floor
Pittsburgh, PA 15219
Attorney for Appellee
BERNARD D. MARCUS, ESQ.
DAVID B. RODES, ESQ.
(argued)
Marcus & Shapira
One Oxford Centre
35th Floor
Pittsburgh, PA 15219
Attorney for Appellant
_____________________________
OPINION OF THE COURT
_____________________________
JOHN R. GIBSON, Senior Circuit Judge:
Giant Eagle, Inc. appeals from an order of the district
court enjoining it from operating a pharmacy in its Quaker Village
shopping center store for the duration of J. C. Penney Company's
1978 lease, including renewals. Giant Eagle argues that Penney's
exclusive right to operate a pharmacy in Quaker Village ended when
Penney's 1962 lease ended, and that Penney's exclusive right is
unenforceable against it because it did not have notice of Penney's
exclusive right. We affirm.
In 1962 the Thrift Drug Company leased a store in the
Quaker Village shopping center to operate a retail drugstore. The
lease required that Thrift Drug use the premises only for operation
of a retail drugstore, and gave it the right to display "such
articles as are displayed and sold by it in its other retail drug
stores." The lease further provided that the owner of Quaker
Village, as lessor, would not permit another tenant to operate a
pharmacy or fill or sell prescriptions. The lease covenanted that
other tenants would be Thorofare Markets, Inc., which would operate
a supermarket, and Triple "A", a national chain variety store.
These tenants were allowed to sell merchandise customarily sold in
drugstores, provided that they did not compound or sell
prescriptions, or sell merchandise limited by state law to licensed
pharmacies. The lease was for a term of fifteen years, and Thrift
Drug was given the right to renew and extend the lease for three
additional five-year terms. Thrift Drug recorded a memorandum of
the lease which set forth a description of the premises, the term
of the lease, and Thrift Drug's right to renew, but made no mention
of Thrift Drug's obligation to operate only a retail drugstore, nor
of the shopping center's agreement prohibiting other tenants from
operating a drugstore. In 1969 Penney acquired Thrift Drug and all
of its rights, including the 1962 lease.
In 1977 Giant Eagle entered into a lease at Quaker
Village, which provided that it was to operate a food and grocery
supermarket for items "customarily sold in the markets which it
operates in the Greater Pittsburgh area." Giant Eagle's lease also
gave Giant Eagle the exclusive right to operate a grocery store in
Quaker Village with the exception of the existing Thorofare store.
Stanley R. Gumberg, the owner of the Quaker Village
shopping center, negotiated the lease with Giant Eagle, and stated
that there was no reference to a pharmacy or drugstore in the lease
provision describing Giant Eagle's use of the premises. He also
stated that at the time the lease was negotiated there was no
thought or discussion of a pharmacy in Giant Eagle's store.
In 1975 Penney began discussing with Gumberg the
possibility of relocating its drugstore within Quaker Village.
Throughout these discussions, Penney insisted on keeping its
exclusive right to operate a pharmacy. In 1978 Penney and Gumberg
agreed that Penney would relocate its drugstore within the shopping
center and continue to have the exclusive right to operate a
pharmacy. The 1978 lease gave Penney the exclusive right to
operate a pharmacy in Quaker Village, and provided that the 1962
lease was to terminate one day after the new lease term started,
thus providing an overlap between the 1962 and 1978 leases. The
1978 lease also covenanted that Giant Eagle was to operate a
supermarket in the shopping center, which was a condition for
Penney operating its new drugstore.
In 1990 Giant Eagle began to make plans to expand its
supermarket in Quaker Village to include a pharmacy. To
accommodate Giant Eagle's plans, Gumberg asked Penney several times
to waive its exclusive right to operate a pharmacy in the shopping
center. Penney consistently refused to waive its exclusive right.
Gumberg told Giant Eagle that Penney had the exclusive right to
operate a pharmacy in Quaker Village and that Penney refused to
waive that right. Despite this information, Giant Eagle began its
construction of a pharmacy at its Quaker Village store. Shortly
thereafter Penney told Giant Eagle and Gumberg that it intended to
enforce its exclusive right. On August 13, 1992 Giant Eagle opened
its pharmacy in Quaker Village, and Penney sued Giant Eagle to
enjoin Giant Eagle's operation of the pharmacy.
The district court granted Penney a preliminary
injunction. J. C. Penney Co. v. Giant Eagle, Inc., 813 F. Supp.
360 (W.D. Pa. 1992). Giant Eagle appealed the preliminary
injunction to this court, and we affirmed the injunction in an
unpublished opinion. J. C. Penney Co. v. Giant Eagle, Inc., 995
F.2d 217 (3d Cir. 1993). The district court later granted Penney
a permanent injunction against Giant Eagle for the duration of
Penney's 1978 lease, including renewals. In granting the permanent
injunction, the district court stated that under Penney's 1962 and
1978 leases Penney continuously held the exclusive right to operate
a pharmacy in Quaker Village. The court also stated that Penney
could enforce its exclusive right against Giant Eagle because the
memorandum of the 1962 lease, which was filed for record, gave
Giant Eagle constructive notice of Penney's exclusive right when
Giant Eagle entered into its Quaker Village lease. Giant Eagle
appeals from the district court's grant of the permanent
injunction.
I.
Giant Eagle argues that Penney cannot enforce its
exclusive right against Giant Eagle because Giant Eagle obtained
its lease in Quaker Village before Penney obtained its 1978 lease
containing the exclusive right. Giant Eagle argues that the 1978
lease did not preserve Penney's 1962 exclusive right for two
reasons. First, Giant Eagle argues that Penney cancelled its 1962
lease and filed for record a lease cancellation agreement stating
that the 1962 lease was null and void. Therefore, Giant Eagle
argues, Penney cannot rely on an exclusive right contained in a
lease which is null and void. Second, Giant Eagle argues that
Penney's exclusive right is a form of restrictive covenant or
negative easement which cannot be transferred from one location
within Quaker Village to another. Giant Eagle concludes that
because Penney moved in 1978, it could not take its exclusive right
with it.
A.
In this diversity case, we must determine and apply
Pennsylvania law, and when the issues have not been authoritatively
determined by the Pennsylvania Supreme Court, we must predict how
it would decide those issues. Adams v. Madison Realty & Dev.,
Inc., 853 F.2d 163, 168 (3d Cir. 1988). Our review is de novo
without deference to the district court. Salve Regina College v.
Russell, 499 U.S. 225 (1991).
For many years the Pennsylvania Supreme Court used
principles of real estate law in interpreting restrictions in
shopping center leases. In Siciliano v. Misler, 160 A.2d 422 (Pa.
1960), the court stated, "In restricting real estate a scrivener
acts at his peril: if his creation is not self-sustaining it is
nothing." Id. at 425. The court rejected the argument that the
intent of the parties should govern. Instead, it looked at the
plain language of the restriction, gleaning the intent of the
parties from the language alone. Id. See also Food Fair Stores,
Inc. v. Kline, 152 A.2d 661, 663 (Pa. 1959).
There were early rumblings of change in Great Atlantic &
Pacific Tea Co. v. Bailey, 220 A.2d 1 (Pa. 1966), which did not
produce a majority opinion. See Mt. Lebanon v. County Bd. of
Elections, 368 A.2d 648, 650-51 (Pa. 1977) (non-majority opinions
of the Pennsylvania Supreme Court are non-decisional); Vargus v.
Pitman Mfg. Co., 675 F.2d 73, 74-75 (3d Cir. 1982) (a majority of
the justices on the Pennsylvania Supreme Court must join an opinion
in its entirety or it is not binding precedent). In Great Atlantic
& Pacific Tea Co., the Baileys, owners of a shopping center,
granted A & P the exclusive right to operate a grocery store in
their shopping center. 220 A.2d at 1-2. Later, the Baileys
purchased land next to their shopping center and rented it to
another grocery store operator. Id. at 2. A & P, relying on its
exclusive right, sued to prevent the operation of the competing
grocery store. Justice Eagen, with two justices joining his
opinion and another only concurring in the result, wrote that
courts must strictly construe exclusive rights granted in shopping
center leases, because they restrict the use of land and such
restrictions are traditionally not favored. Id. at 2-3. Following
this reasoning, Justice Eagen concluded that A & P could not
enforce its exclusive right against land acquired after its lease
because A & P's exclusive right did not state explicitly that it
applied to after-acquired land. Id. at 3.
Justice Roberts, joined by two other justices, dissented
in Great Atlantic & Pacific Tea Co. Id. at 4. Justice Roberts
stated that exclusive rights are important for the development of
modern shopping centers and that the modern approach was to
realistically interpret the exclusive right so as to give effect to
the intent of the parties. Id. at 5-6 (citing Cragmere Holding
Corp. v. Socony-Mobil Oil Co., 167 A.2d 825, 827 (N.J. Super. Ct.
App. Div. 1961) and other cases). Justice Roberts rejected the
uncritical application of the doctrine of strict construction to
defeat the obvious purpose for which a covenant was included in a
lease agreement. In ascertaining the intention of the parties, he
wrote, the restriction should be interpreted in light of the
apparent purpose of the covenant and the conditions existing at the
time the lease agreement was executed. Id. at 6. After
considering the circumstances surrounding execution of the lease,
Justice Roberts concluded that the parties intended for A & P to be
the only grocery store in the shopping center and that A & P could
enforce its exclusive right against land added to the shopping
center after A & P's lease. Id. at 6-7. In essence, Justice
Roberts was arguing for the use of contract law, rather than the
real estate law governing land use restrictions.
Shortly after Great Atlantic & Pacific Tea Co., the
Pennsylvania Supreme Court, with one justice not participating,
evenly split over the interpretation of exclusive rights in
shopping center leases. Sun Drug Co. v. West Penn Realty Co., 268
A.2d 781 (Pa. 1970). Again, three justices argued that exclusive
rights should be strictly interpreted because they restricted the
use of land. Id. at 783. Justice Roberts continued to state that
exclusive rights contained in shopping center leases should be
realistically interpreted so as to give effect to the intent of the
parties to the lease. Id. at 785-86.
Exclusive rights in the shopping center lease context
were again considered by the Pennsylvania Supreme Court in Teodori
v. Werner, 415 A.2d 31 (Pa. 1980). The issue in Teodori was
whether a tenant had an independent continuing obligation to pay
rent when the landlord violated the tenant's exclusive right to
sell jewelry. Justice Roberts wrote the court's unanimous opinion.
He recognized that the old common law of landlord and tenant
relations based on real estate principles would recognize the
independent obligation of the tenant to continue paying rent even
though the landlord had violated the tenant's exclusive right.
Teodori, 415 A.2d at 33. Justice Roberts began his discussion by
stating: "It is now clear, however, that this view of landlord-
tenant relations, incorrectly resting more on notions of property
law than on principles of contracts, has no place in modern
jurisprudence." Id. The court continued that the independent
obligation approach must be rejected where the landlord breaks a
promise in the lease which "is a significant inducement to the
making of the lease by the tenant." Id. at 34 (quoting Restatement
(Second) of Property, Introductory Note to Chapter 7 (1977)). The
opinion continues:
It is obvious that a landlord's non-
competition promise is critical to a
commercial lease agreement like the one here.
"The mere presence in a lease of a
noncompetition promise by the landlord
justifies the conclusion that it is essential
that the promise be observed if the tenant is
to conduct his business on the leased property
profitably."
Id. (quoting Restatement (Second) of Property 7.2 cmt. b (1977)).
In a lengthy footnote the court reiterated the importance of
exclusive rights in shopping center leases in assuring the mix of
quality businesses essential to a shopping center's financial
success. Id. at 34 n.5 (citing Cragmere Holding Corp. v. Socony-
Mobil Oil Co., 167 A.2d 825 (N.J. Super. Ct. App. Div. 1961)).
Teodori represents a substantial change in the
Pennsylvania Supreme Court's approach to shopping center leases
with exclusive rights. Although the court's holding is limited to
the independent obligation for the tenant's payment of rent, the
court applied contract-law principles for determining the intent of
the parties and rejected the strict approach of real estate law,
which had been the law of Pennsylvania. See also Cimina v.
Bronich, 537 A.2d 1355, 1358 (Pa. 1988) ("[A] lease is in the
nature of a contract and is controlled by principles of contract
law.") (citing Amoco Oil Co. v. Snyder, 478 A.2d 795 (Pa. 1984),
and Ezy Parks v. Larson, 454 A.2d 928 (Pa. 1982)); Pugh v. Holmes,
405 A.2d 897, 903 (Pa. 1979) (same). Teodori completed what
Justice Roberts had argued for in Great Atlantic & Pacific Tea Co.,
and Justice Eagen's joining in Justice Roberts's Teodori opinion
demonstrates the abandonment of the strict approach to exclusive
rights which Justice Eagen adhered to in his Great Atlantic &
Pacific Tea Co. plurality opinion.
Accordingly, we must analyze the relationships in this
case under the rules announced in Teodori.
B.
Penney is attempting to enforce against Giant Eagle its
exclusive right to operate a pharmacy in Quaker Village contained
in its 1978 lease, and thus, we must examine the terms of the lease
and the circumstances surrounding the lease. Sun Drug Co., 268
A.2d at 785-87 (Roberts, J., opinion in support of orders); Great
Atl. & Pac. Tea Co., 220 A.2d at 5-6 (Roberts, J., dissenting).
In so doing, we begin with Giant Eagle's 1977 lease,
because Gumberg negotiated this lease at the same time he
negotiated Penney's 1978 lease. Giant Eagle's lease stated that
Giant Eagle "shall use the [rented] premises as a food and grocery
supermarket for the sale of items customarily sold" in other Giant
Eagle supermarkets in the greater Pittsburgh area. Giant Eagle's
lease also gave Giant Eagle, with one exception, the exclusive
right to operate a grocery store in the Quaker Village shopping
center. Gumberg testified that he did not in any way contemplate
giving Giant Eagle the right to operate a pharmacy. Joseph
Faccenda, Giant Eagle's Vice President, also testified that there
were no pharmacies in any of Giant Eagle's stores in 1977. This
testimony, coupled with the clear language of Giant Eagle's lease,
shows that Gumberg intended to give Giant Eagle the exclusive right
to operate only a supermarket in Quaker Village.
The negotiations behind the 1978 lease between Gumberg
and Penney, on the other hand, show that Gumberg intended to grant
Penney an exclusive right to operate a pharmacy. Throughout the
negotiations concerning the move of its drugstore within Quaker
Village, which began in the fall of 1975, Penney insisted on
preserving its exclusive right from the 1962 lease, and insisted
that the transaction be structured so as to maintain continuity
with the 1962 lease. When Gumberg submitted one draft of a lease
to Penney that did not contain the exclusive right, Penney's
representatives promptly insisted that the exclusive right be
included in the lease. Penney agreed to move on the condition that
its exclusive right remain in full force. As a result, the lease
not only contained the exclusive right Penney wanted, it also
provided that the 1962 lease would terminate one day after the
start of the 1978 lease. This overlap ensured the continuity in
Penney's tenancy and exclusive pharmacy right. Gumberg testified
that Penney's 1978 lease gave Penney the exclusive right to operate
a pharmacy in the Quaker Village shopping center.
The terms of the 1978 lease are entirely consistent with
the parties' intent to grant Penney an exclusive pharmacy right.
The lease stated that during the term of the lease Gumberg would
"not use or occupy, or permit the use or occupancy of, any space"
other than Penney's for "the operation of a drug store, or a drug
department, in which a registered pharmacist is in attendance or
required by law to be in attendance for any period of time," nor
would Gumberg enter into any lease which would permit another
tenant or sub-tenant to use space in Quaker Village for such
purposes. The exclusive right provision concluded by stating that
Gumberg "covenants and agrees that rights similar to the rights
herein granted by [Gumberg] to [Penney] are not held by any other
tenant or occupant of space within" Quaker Village.
In addition, Penney's 1978 lease acknowledged that
Gumberg had entered into a new lease with Giant Eagle to operate a
food supermarket. Penney's lease provided that Penney "shall be
under no duty or obligation to open [its] store for business . . .
unless and until the Giant Eagle food supermarket has opened or is
about to open its store for business."
The circumstances surrounding the negotiation of the 1978
lease and the language of the lease itself show that Gumberg and
Penney intended to preserve and continue, in essentially the same
terms, the exclusive right to operate a pharmacy which Penney
acquired through the 1962 Thrift Drug lease.
The intention of the parties surrounding both leases is
thus plainly expressed. As Giant Eagle's 1977 lease shows, Giant
Eagle obtained the exclusive right to operate a supermarket, and
received Gumberg's promise that, with the exception of the
Thorofare store, such rights would not be granted to any other
tenant. Gumberg granted Penney the existing pharmacy right in
Penney's 1978 lease in the context of Giant Eagle's supermarket
lease. Penney's intent that it have an exclusive right to operate
a pharmacy is clearly expressed. While Faccenda, on behalf of
Giant Eagle, denied knowledge of Penney's exclusive right when
Giant Eagle executed its lease, he also stated that exclusive-right
provisions were common in shopping center leases at that time, and
that there were no pharmacies in Giant Eagle's stores in 1977. In
addition, Giant Eagle's counsel conceded that Giant Eagle knew that
there was a 1978 lease with Penney containing exclusive-right
language. These expressions of intent amply demonstrate that
Gumberg and Penney intended to preserve Penney's exclusive right
from the 1962 lease when they entered into the 1978 lease, and that
the 1978 lease preserves and continues that preexisting exclusive
right. Because Penney's 1978 lease preserves its 1962 exclusive
right, we hold that Penney's exclusive right predates Giant Eagle's
1977 lease.
Both of Giant Eagle's arguments against extension of
Penney's 1962 exclusive right ignore Pennsylvania law which
requires us to realistically interpret shopping center leases in
light of the intent of the parties under contract principles.
While the 1978 lease declared the 1962 lease null and void, this
provision must be read with the other provisions in the 1978 lease
and the circumstances surrounding the execution of the 1978 lease.
The overlap of the two leases shows that although the 1978 lease
cancelled the 1962 lease, the parties expressly intended to
continue the exclusive pharmacy right from the 1962 lease.
Giant Eagle's second argument is the type of traditional
property-law argument which the Pennsylvania Supreme Court rejected
in Teodori. 415 A.2d at 33-34. The court in Teodori decided that
courts should realistically interpret shopping center leases under
contract-law principles, rather than traditional property law, to
give effect to the economic realities at work in shopping centers.
Id. After Teodori, the intent of the parties governs the
interpretation of shopping center leases and the traditional
property-law restrictions on restrictive covenants and negative
easements do not apply.
Thus, we conclude that the district court's finding that
the exclusive provisions in the 1962 and 1978 leases "have
expressly, unambiguously, and continuously since 1962" prohibited
the landlord from using or permitting "the operation of any other
drugstore or drug department with a registered pharmacist in
attendance" was a fact not clearly erroneous, and a conclusion well
drawn from the intent of the parties as expressed in the language
of the leases, and in the negotiations with respect to the
execution of the leases. The district court did not err in its
holding that Penney had the exclusive right to operate a pharmacy
at the shopping center.
II.
Giant Eagle argues that even if Penney had an exclusive
right to operate a pharmacy, it only had notice of the right by way
of the 1962 lease which, by its terms, would end no later than
1993. Therefore Giant Eagle contends that to allow Penney to
extend the exclusive right beyond 1993 violates the rights it
acquired under its 1977 lease.
As long as Giant Eagle had notice of Penney's exclusive
right when it entered into its Quaker Village lease, it is bound by
the proper interpretation of that right even though that is not the
interpretation it placed on that right. 3 Milton R. Friedman,
Friedman on Leases 28.601 (3d ed. 1990). Accordingly, to decide
whether Penney could extend its exclusive right beyond 1993, we
must again look to the parties' intent. See Sun Drug Co., 268 A.2d
at 785-87 (Roberts, J., opinion in support of orders); Great Atl.
& Pac. Tea Co., 220 A.2d at 5-6 (Roberts, J., dissenting).
Looking at all the leases, it is evident that Gumberg
intended to grant exclusive rights to tenants operating different
kinds of retail establishments. The 1962 lease with Penney's
predecessor specifically warranted that Thorofare Markets, Inc.
would operate a supermarket and that Triple "A" would operate a
variety store. Giant Eagle's 1977 lease granted Giant Eagle the
exclusive right to operate a supermarket subject to the exception
recognized for the existing Thorofare store, and specifically
provided that Giant Eagle's exclusive right would not cover
restaurants or delicatessens. Penney's 1978 lease provided that
Gumberg had entered into a lease with Giant Eagle, and provided
that Penney was under no duty or obligation to open, unless and
until the Giant Eagle store was about to open. It is apparent that
in each lease, the tenant undertook obligations concerning its
business, but also received from the lessor assurances about the
other tenants within the shopping center. Such an
interrelationship is recognized, particularly in the footnotes, in
Justice Robert's opinion in Teodori, 415 A.2d at 34 n.5, as well as
in his dissent in Great Atlantic & Pacific Tea Co., 220 A.2d at 5-6
nn.2-3.
There was just such an interrelationship between Gumberg,
Penney, and Giant Eagle. Both the 1962 lease and the 1977 Giant
Eagle lease provided for fixed terms, and gave the tenant the
option to renew or extend for a stated number of five-year terms.
Such renewals and extensions would, of course, include the
exclusive rights granted to each tenant. There is no language in
any of the leases, nor any testimony about the lease negotiations,
indicating that any of the parties intended to restrict the
parties' ability to negotiate a new lease, whether it be referred
to as a renewal or extension, at the end of the lease term.
Indeed, the fact that Gumberg and Penney negotiated the 1978 lease
over a three-year period demonstrates that there was no such
restriction.
Similarly, there is no indication in the record of any
intent to restrict the landlord's ability to grant exclusive rights
to tenants, as he had granted in all the earlier leases, or to
strip the landlord of the ability to control the mix of the
shopping center, and to grant the exclusive rights to operate
specific businesses as he chose. Indeed, the evidence about the
interrelationship between the landlord and the several tenants
demonstrates that the parties intended to allow the landlord to
negotiate continuations of existing leases, preserving their
exclusive rights. If there is any difficulty in reaching this
conclusion, there is nothing in the 1962 lease, the 1977 Giant
Eagle lease, or the 1978 Penney lease that permits a conclusion
that the parties intended to allow Giant Eagle to operate a
pharmacy, a right that Gumberg had previously granted to Penney.
Giant Eagle has failed to explain why the owner of Quaker
Village would limit his ability to extend or renew an exclusive
right within his shopping center. Likewise, there is no reason to
suspect that Thrift Drug agreed to limit its ability to extend or
renew its exclusive right in the future. The 1962 lease does not
state that the exclusive right cannot be extended or renewed. On
the contrary, the language in the lease states that the exclusive
right shall continue through any extension or renewal of the lease.
When the several leases in this case are considered, it is evident
that the landlord demonstrated a clear intent to control the mix of
establishments in the shopping center, and that each of the tenants
in entering into leases benefitted from this intent. The
interrelationship between the tenants, as we have discussed, was
part of the parties' underlying intent. We see nothing in any of
the leases that would permit any tenant to presume that after the
expiration of another tenant's lease, it would gain the right to
enter into a competing business or a completely unrelated business.
In light of these circumstances, we hold that the parties to the
1962 lease intended to allow extension of the exclusive right as
they might see fit in the future, and that the proper
interpretation of the 1962 exclusive right permits its extension.
Gumberg and Penney intended Penney's 1978 lease to extend and renew
Penney's 1962 exclusive right. Therefore, we also hold that
Penney successfully extended its exclusive right for the duration
of its 1978 lease, including any renewals. Our interpretation
allowing the extension of Penney's exclusive right beyond 1993 is
binding on Giant Eagle.
III.
Finally, Giant Eagle argues that it did not have notice
of Penney's exclusive right when it entered into its Quaker Village
lease in 1977 and, therefore, Penney cannot enforce that right
against it.
Thrift Drug did not file for record the entire 1962
lease. Instead, it filed a memorandum of the lease as allowed by
section 405 of title 21 of the Pennsylvania statutes. Section 407
of title 21 defines the effect of recording a lease memorandum.
Section 407, which is titled "Effect of recording lease, sublease,
agreement or memorandum," provides:
The recording of any such lease,
sublease, agreement or memorandum in
accordance with the provisions of this act
shall constitute constructive notice to
subsequent purchasers, mortgagees and judgment
creditors of the lessor of the making and of
the provisions of such lease, sublease or
agreement, including any purchase or refusal
provisions set forth in the lease, sublease or
agreement.
Pa. Stat. Ann. tit. 21, 407 (Supp. 1995) (emphasis added).
Giant Eagle argues that under section 407 the recording
of a lease memorandum results in constructive notice only to
"subsequent purchasers, mortgagees and judgment creditors of the
lessor." Giant Eagle contends that it is a lessee, not a
subsequent purchaser, mortgagee or judgment creditor, and,
therefore, it received no constructive notice from the recorded
lease memorandum. Penney responds that Giant Eagle is a
"purchaser" within the meaning of section 407 because a lease is
really a sale of land for a term of years.
A close examination of section 407 shows that the
legislature intended the recording of a lease memorandum to give
constructive notice of the entire lease to subsequent lessees.
Section 407 not only defines the effect of recording a lease
memorandum, but also the effect of filing a lease, sublease or
lease agreement. This is plainly reflected in the terms of section
407. If we were to accept Giant Eagle's interpretation of section
407, not even the recording of the entire lease would constitute
constructive notice to a subsequent lessee. Under Giant Eagle's
interpretation, there would be no way to give constructive notice
of the terms of a lease to a subsequent lessee. A more reasonable
interpretation of section 407 leads to the conclusion that the
legislature intended the term "purchasers," as used in section 407,
to include lessees. Indeed, the Supreme Court of Pennsylvania has
so held. Commonwealth v. Monumental Properties, Inc., 329 A.2d 812(Pa. 1974) (holding that a lease of real property is a sale under
the Pennsylvania Consumer Protection Law). Consequently, the
district court did not err in holding that Giant Eagle was at least
constructively, if not actually, aware of the exclusive provision
in Penney's lease.
The record before us supports this conclusion. Giant
Eagle's Vice President, Faccenda, stated that while he was not
involved with exclusive rights in 1977, Giant Eagle had a staff of
real estate and legal people who were expected to handle these
functions and to ensure that everything that Giant Eagle was doing
was proper and legal. He would expect them to find a recorded
document which restricted the use of the premises Giant Eagle was
about to lease. He was aware when Giant Eagle moved into Quaker
Village in 1977 that there was a Thrift Drug store there and that
it was logical for Thrift to have a lease, but he would not have
paid attention to details like exclusive rights in other leases.
This testimony is sufficient to raise an inference that when Giant
Eagle signed the lease in 1977 it knew of Penney's exclusive right
in the 1962 lease. Also, Faccenda's knowledge that exclusive
rights were common in 1977, as well as the exclusive right
contained in Giant Eagle's lease, support the inference that this
is a subject about which Giant Eagle and its representatives would
have been interested. The record makes clear that both Penney and
Giant Eagle were sophisticated lessees, and indeed were involved in
some three other disputes in which Giant Eagle was seeking to
enforce exclusive rights to operate pharmacies in other leases.
While Giant Eagle argues that a single lessee would have no right
to obtain information from a landlord about other lessees, the
record is to the contrary. In Penney's letter to Gumberg's
attorney on January 12, 1978, Penney requested copies of the use
and exclusive-right provisions from the leases of other tenants
within the shopping center. There was strong evidence in the
record to support the district court's finding that Giant Eagle was
constructively, if not actually, aware of the exclusive-right
provisions in Penney's leases.
We think it also follows that when Giant Eagle decided to
open a pharmacy in 1990 it was bound by the exclusive rights
granted to other tenants. Giant Eagle conceded that in 1977 it was
not operating a pharmacy in any of its stores and its lease
certainly did not give them a right to operate a pharmacy. In 1977
Giant Eagle knew of Penney's rights under the 1962 lease. From
1978, well before Giant Eagle operated pharmacies in its
supermarkets and in 1990 when it decided to open a pharmacy, it had
constructive notice of Penney's exclusive right as granted both in
the 1978 and 1962 leases.
Accordingly, we affirm the order of the district court
granting the permanent injunction.
J.C. PENNEY COMPANY, INC. V. GIANT EAGLE, INC., ET AL.
No. 95-3054
STAPLETON, J., dissenting:
I respectfully dissent.
I start with the proposition that restrictive covenants
in prior conveyances are binding only against future lessees with
actual or constructive notice before the lease is signed. See
Finley v. Glenn, 154 A. 299, 301 (Pa. 1931); see generally3 M. Friedman,
Friedman on Leases 28.601 (3d ed. 1990). J.C.
Penney's lease agreement thus will not support the district court's
injunction in the absence of actual or constructive notice to Giant
Eagle.
I believe the record contains insufficient evidence to
permit a finding that Giant Eagle had actual notice of J.C.
Penney's exclusive when Giant Eagle signed its lease in 1977. In
any event, as the court acknowledges, the district court made no
finding that Giant Eagle had actual notice at that time. Based on
the particular facts of this case, however, we may assume,
arguendo, that Giant Eagle had actual notice of the exclusive in
1977. We may also assume, without deciding, that 21 Pa. Stat. Ann.
407 applies here and that Giant Eagle had constructive notice in
1977 of the existence and provisions of J.C. Penney's 1962 lease,
including the restrictive covenant. Finally, we may also assume
without deciding that J.C. Penney's 1978 lease effectively
continued the 1962 pharmacy exclusive in the new location within
the shopping center--that is, that the restrictive covenant runs
with the restricted land retained by the landlord (the entire
shopping center), not with the premises originally leased by J.C.
Penney in 1962. Thus, had J.C. Penney merely moved to a new
storefront within the shopping center in 1978 but otherwise
retained all the provisions of the 1962 lease, including the
original term and renewal rights provisions, we may assume that
Giant Eagle could have been bound by the restrictive covenant for
the maximum 30-year term of the 1962 lease.
While the 1978 lease alone, independently of the 1962
lease, may bind co-tenants who signed leases after 1978, it cannot
bind a pre-existing tenant such as Giant Eagle. The critical
issue, then, is whether J.C. Penney's 1978 lease could operate as
an extension of the restrictive covenant in the 1962 lease beyond
its original maximum term of 30 years.
In 1977, Giant Eagle had notice that J.C. Penney's 1962
lease would expire, at the latest, 30 years from its effective
date, or August 31, 1993. Giant Eagle cannot be bound by any
extension of the restrictive covenant beyond that date because
J.C. Penney's lease did not include any such extension right at the
time Giant Eagle signed its lease.
Pennsylvania's lease recording statute explicitly
requires that a memorandum of lease must contain the expiration
date of the final period for any right of extension or renewal. 21
Pa. Stat. Ann. 405. Notice of the maximum term of a lease is
important because the term partly defines or circumscribes the
rights of a purchaser, mortgagee, or judgment creditor--or, as I
have assumed, a tenant to be bound by a co-tenant's restrictive
covenant. A purchaser with notice of a recorded lease takes the
property subject to that lease only for the maximum term; that is,
the purchaser has bought the right to hold the property free of the
leasehold interest after the final expiration date indicated in the
recorded lease agreement. Similarly, a tenant who enters into a
shopping center lease agreement, with at least constructive notice
of a co-tenant's lease containing a restrictive covenant, has
bought the right to be free from the restrictive covenant at the
expiration of the co-tenant's lease as recorded.
Allowing a tenant to extend a binding restrictive
covenant by merely extending the term of its lease beyond the
original, maximum term would operate to bind a co-tenant to a
restrictive covenant for a period of time during which the co-
tenant had no notice it could be bound. There is no principled
difference between binding a co-tenant to such an extension and
binding a co-tenant to a restrictive covenant of which it had no
notice at all in the first instance: either way, a co-tenant's
property rights are more restricted than they were disclosed to be
at the time the co-tenant entered into its lease agreement.
Giant Eagle signed its lease in 1977, half-way through
the maximum 30-year term of J.C. Penney's 1962 lease, with notice
that J.C. Penney's pharmacy exclusive would prohibit Giant Eagle
from operating a pharmacy until 1993 at the latest. The district
court's holding necessarily implies that Giant Eagle had no right
to expect, in 1977, that it could operate a pharmacy department
after 1993 for the remaining 24 years of its lease. In other
words, the district court's rule would have given J.C. Penney and
the landlord the right at any time prior to 1993 to decide between
themselves to bind Giant Eagle to an extension of the restrictive
covenant without obtaining Giant Eagle's consent. Such a rule
cannot be correct because it operates retroactively to restrict a
tenant's property rights under its lease agreement.
I would accordingly decide that, at least with respect to
pre-existing tenants such as Giant Eagle, J.C. Penney's 1978 lease
did not extend the pharmacy exclusive beyond the expiration of the
maximum term of the 1962 lease on August 31, 1993. We may assume
that Giant Eagle was thus in violation of the restrictive covenant
when it opened its pharmacy department in August 1992, and when the
district court granted J.C. Penney's motion for a preliminary
injunction the following month. However, by the time the district
court ordered permanent injunctive relief in January 1995,
J.C. Penney's exclusive was no longer binding against Giant Eagle.
J.C. Penney's exclusive, therefore, cannot be a basis for affirming
the permanent injunction. I would reverse the judgment of the
district court, thereby vacating the permanent injunction.